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Fool Portfolio Report - Tuesday, August 13, 1996

ALEXANDRIA, VA, August 13, 1996 -- Not a single Fool stock, new or old, rose
today. It was extremely ugly out there. The Fool Portfolio dropped 2.95%,
while the Nasdaq and S&P 500 losses were in the 1 percentage point ballpark.
What happened out there?

Well, first, we formally waved goodbye to The Gap (cf. Gap Sell Report).
Dave threw on his Daytrada Cap and tried to pick up the best price possible.
He hit a bid of $35 1/8 and woosh, we were gone.

Fools, the Company did us proud while renting out some of our capital for
the last 16 months. Sixty thousand Gap employees around the globe served
the planet with casual clothing at reasonable prices---and turned 100%+ returns
for shareholders over the past year. Outstanding. The first responsibility
of a public company is to reward the stakeholders, who have taken on capital
risk upfront. When businesses take their operations to the public marketplace,
they move into a world where primary obligations lie with their shareholders.
Speak with management at Coca-Cola, General Electric, Hewlett-Packard and
other great companies, and you'll find that serving the long-term interests
of stakeholders does not only allow them to do great business for customers
and employees, it promotes it.

With some the broadest of profit margins in its industry and without compromising
future growth through borrowing, Gap has done just that. Consequently, they've
built the broadest-reaching and strongest consumer brand in apparel retailing,
while honoring duties to their owners, employees and customers.
Highly-profitable, well-marketed, unleveraged consumer businesses won't be
going out of style anytime soon.

Now stepping up in their place, the mighty 3Com Corporation (NASDAQ:COMS),
which met our purchase price of $46.86 per share with a prompt $1 drop to
close out the day. Our reasoning for the purchase is detailed in our 3Com
Buy Report. This morning the Company announced enhancements to its OfficeNet
products for small businesses. Priced in the $1500 range, OfficeConnect runs
on Fast Ethernet, which enables highspeed Internet access and capacity to
handle rich multimedia applications. 3Com Vice President Edgar Masri offered
the following in the announcement:

"Small business is big business for 3Com. There are over 22 million
businesses within Europe and the US alone which have fewer than 20 employees.
This presents a tremendous new market opportunity for 3Com."

Veteran Fools know that we like to find highly-profitable businesses looking
for lower price-points, a broader business reach, and brand identity. Hopefully
3Com will fit that bill. Hopefully AT&T's placement in the Foolish Four
group identifies other networking and communications stocks as... due!

America Online dipped $1 1/4 to $29 today. The Company announced the launch
of its AOL on the Move! campaign, designed both to attract the vast majority
of Americans that are not users of online and the Internet and to strengthen
ties with existing users. The tour begins August 15-16 in Boston and Chicago
and will hit 29 cities between then and September 16.

KLA Instruments took another shot to the chops today, losing $1 1/2 to $18
1/4. There has been some grumbling in Fooldom about our inadequate coverage
of klickety-KLAC, which has hammered us with 59% losses, or nearly $3500.
KLAC announced fourth-quarter earnings of 61 cents, two cents below Street
estimates. 4th quarter margins fell from 17.5% to 16.6%. But fiscal 1996
profit margins rose to 17.3% from 13.2% last year.

With $690 million in trailing sales, KLAC is now selling at less than 1.5x
sales. With $2.31 in earnings, KLAC is now selling at less than 8x earnings.
Projections for fiscal 1997 sit at $2.50 with an estimated long-term growth
rate of 25%. My trusty calculator spits out a 16% growth rate and a fair
price of $37 per share for this issue. Our purchase price was $44.71 per
share, with a target price above $80. Things have definitely changed. To
emphasize how different today is than when we opened our position in KLA
Instruments a year ago, consider this paragraph from our buy report:

As you can see, we're buying two semiconductor companies this week. It's
The Fool Portfolio's first foray into the industry, and it comes after a
tremendous amount of past success for companies like Intel, Micron Technology,
and many others. Both of our new buys have doubled in the past year. Do we
feel late to the party? Nope.

Oh, boy. Could we have been any more misguided about the state of things
in Denmark? Semiconductor stocks fell off the roof in the immediate weeks
that succeeded our purchase, and they haven't recovered. We expect KLA to
rally back up toward and past $30 in the year ahead, but what good have our
growth valuation tools been for semiconductor and semi-equipment stocks?
Not much.

You're going to find, however, that we'll make mistakes, lose money on select
investments and look oafish in the process. This is one of the few guarantees
we'll make about our portfolio---that we'll make mistakes. Some of the others
are that we'll always account upfront for all commissions and spreads, that
we'll always announce our trades in advance of making them, that we'll always
stabilize our savings account with Dow yielders, and that we'll always aspire
to beat the US stock market... the best place to have had your long-term
bucks over the past century.

As for our coverage of KLAC going forward, you should know that our bias
is toward following the stocks that are making us money and that take up
more space in our Port. Every good business out there phases down unsuccessful
products and concentrates additional energies to analyzing successful products.
As investors we must understand our mistakes and work to eliminate them.
The simplest, least frustrating road toward continual improvement is to
thoroughly comprehend what has been successful and why.

Thus, expect more heavy weighting of concentration toward our larger positions.
When KLAC dropped $1 1/2 today, or 7.6%, we lost approximately $200. That
in an account presently valued in excess of $119,000. I truly believe that
the best lesson to be learned from this is that you cannot PEG or YPEG
semiconductor stocks. Lesson re-learned in this case, since we wrote as much
in our investment guide. Darn it!

Now having briefly explored what went wrong and identifying a mistake we
hope never to make again, we will continue to focus the majority of our attention
on those investments that are thriving, that are becoming a larger percentage
of the business that is our portfolio. We're not trying to shuffle this under
the rug or behind that armoire in the corner. Concentrating on your
winners---both because they grow to mean more to your portfolio and because
they can lead you to other monster companies and stocks---is an investing
discipline to master.

I'll close tonight with our Dow stocks, encouraging all Fools to download,
print, copy and paste or read online our Foolish
Four Switch Report. Tomorrow, Chevron and General Motors go ex-dividend...
so we'll be picking up some chump change there. Those monies will only in
some small way make up for the broader Dow decline today. AT&T fell $1
1/2, GM dropped a buck, and 3m and Chevron tossed back quarters and eighths.

It's a new portfolio now. Allocation adjusted, in anything from automobiles
to acne creams, from online communication to sticky tape. This should be
a year to remember.